United States

United States

American offshore rules far from perfect

America's Minerals Management Service, more used to dealing with the depletion of oil and gas resources than with abundant wind energy, has front-loaded wind with a series of levies and charges in its draft regulations governing offshore development while at the same time leaving the door open for opponents to wreck the permitting process. The wind industry is looking to amend the draft as it moves into offshore mode

Offshore wind power development in the United States continues its slow march towards becoming a reality. Particularly along the populous eastern seaboard, the attraction of much stronger and steadier winds at sea is pulling in investors despite the higher capital costs of offshore wind power and the abundance of opportunities in other areas of the country for building on land. After years of delay, one major hurdle has now been cleared: the federal government's leading regulatory agency for offshore energy development, the Minerals Management Service (MMS), has forged the draft regulations that are expected to govern wind power development off the shores of America.

For many decades, the agency has managed the country's natural gas, oil and other mineral resources on the outer continental shelf -- a history that is not benefiting the forging of regulations for wind power, says the wind industry. It hopes to persuade the agency to amend its draft before the document is finalised this month. The lease fees, or cost to rent ocean space, are too high, complains the industry.

Furthermore, not enough precautions have been taken to keep opponents of offshore wind power from infiltrating the system to delay or stall projects. Unlike in Europe, where wind power is more welcome offshore than on land, the opposite has proved the case in America, with massive and powerful opposition to the sight of wind turbines off the coastline.

Among the core provisions of the MMS draft regulations, which govern projects located in federal waters, is the cost structure for lease of areas of the seabed. Federal waters start just under five kilometres from shore in all states except in Texas, where they begin at just over 16 kilometres from shore. Offshore wind companies will have to pay the federal government a percentage of revenues starting at 1% during the first two years and then adjusting to 2% for the remaining years. "That's a hefty figure," says Jim Lanard of Bluewater Wind, an offshore wind development subsidiary of Babcock & Brown.

"The model was more oriented as if this was an oil and gas lease where you're extracting resources that are being depleted," says Lanard. "The wind seems to blow the next day like it did the day before, we're not taking any wind out of the atmosphere, so our interest here is to get a little more reasonable treatment on royalty payments, because it's so expensive to build offshore. We think the federal government, as a straight policy issue, should say, look, if you're not depleting the resource, we shouldn't charge you as if you are."

The law would also carve out 27% of those fees to be directed to any states that are within six miles of a wind project, presumably to give direct incentives to states that are supportive of offshore wind and to minimise local opposition.

Leases based on fossil prices

But how all the fees are calculated leaves a lot to be desired. "The other area you can see they really haven't though through the electricity market is that they propose that the operating fees be tied to state-wide average retail prices, which has a whole host of problems," says Jeremy Firestone, a professor at the University of Delaware with a special expertise in the subject. The 1% and 2% fees are to be determined by the sum of a wind plant's annual generation multiplied by the previous year's average retail price for electricity in the state where the wind power makes landfall. So, instead of the percentages being levied on actual revenues from sales of electricity from offshore wind plant, they will be based on a hypothetical figure that is partly dependent on the price of fossil fuel.

If the fee was based on the cash revenues of a wind plant, then no problem, says Firestone, but tying the fee to state-wide retail rates is more expensive and does not allow wind to be decoupled from fossil fuel price risk. "The real folly of it, if you tied it to prices in the market, you are tying the operating fee to fossil fuel prices, which may be anything 15 years from now. It's still going to be driven by fossil fuel prices, but one of the biggest advantages of wind is that it is price stable," says Firestone.

In addition to the annual lease, offshore wind power owners would be required to pay an undetermined bonus payment similar to that made by oil and gas companies. Lanard questions whether this is not simply adding an undue and unwarranted cost to wind power.

Bluewater Wind's plan for a wind plant off the coast of Delaware, arguably the most advanced in America, is projected at $1.4 billion for a 450 MW project. The company secured a 25-year power purchase agreement (PPA) with a utility in the summer for the first 200 MW of the project. A total rate of $117.10/MWh is to be paid for the generation, which includes associated renewable energy credits (Windpower Monthly, September 2008). Typically, a contract for land-based wind generation in America paid $45/MWh in 2007, according to the Lawrence Berkeley National Laboratory, much less than half the offshore rate secured by Bluewater.

Speculative misuse

The second major problem with the MMS draft is that it could inadvertently allow incapable, under-capitalised developers to clog up the leasing process. Worse yet, it could enable anti-wind groups to delay or scuttle proposed wind projects. In drafting its offshore energy rules, MMS was directed by the US Congress to facilitate a competitive bidding process for offshore energy uses. The concept itself is good, but the way it is structured is not, says the American Wind Energy Association (AWEA).

"The current bidder qualifications are that you have to be a US citizen and you have to be incorporated and that's pretty much it," says AWEA's Laurie Jodziewicz. "That does not seem to be necessarily strong enough to ensure the people who are actually intending to develop are the ones bidding."

If the threshold for being able to bid on a particular site is too low, developers lacking a realistic chance at completing the project could draw on the limited resources of MMS to review their proposals and create undue competition and delays for all competing developers. Anti-wind groups could even incorporate an entity designed purely to apply for a site in competition with a real wind developer, creating delay and unnecessary competition within the MMS process that would stall real efforts at getting turbines offshore, fears the wind industry.

"We do have concerns about the potential misuse by speculators or others that may just be interested in delaying projects," says Jodziewicz. "We did feel there is some need to have some stronger bidder qualifications so there is some sort of technical and financial capacity to actually complete the project, and some intent to actually do it." It is a matter of separating out the "dream, briefcase and a rental car types," adds Lanard.

For Firestone, the biggest threat comes not from unqualified bidders but from wind energy opponents. "The upfront fees are pretty small and the operating fee is very high. A group like The Alliance for Nantucket Sound could come in with the cash to bid on a site and sit on it for five years," he says, referring to the well-heeled organisation that has been fighting for years against an offshore wind proposal called Cape Wind, proposed between Nantucket Island and the Massachusetts mainland.

Part of the solution is to require a substantial enough application fee or letter of credit, which sets a higher bar for who can bid into the process. But finding a careful balance is important too, points out Jodziewicz, so it is not just big companies with big balance sheets that can take part in offshore wind development and other energy forms in the US. The MMS rules also govern wave and tidal generation.

Hope for improvement

While the wind industry has other concerns with the 300-plus page MMS guidelines, the twin issues of bidder qualifications and the cost of the leases are the major items they are looking to see improvement in when the final rules are released. Even if the amendments are not included, lobbyists are still hoping revisions can be made. "Given they had three years, I guess it's somewhat surprising that some of these things were in here," says Firestone. "I don't want to be unduly negative, a major rulemaking is a large undertaking. I think it reflects more a lack of adequate funding and staff to do the job more than anything else.

"Now they have input from some people who are knowledgeable about how the industry might function, I'm optimistic they will make appropriate adjustments to the rules and move it forward in a productive manner," he adds. "But if the final rules look like the proposed rules, then we can say we're disappointed."

Developers line up

A variety of offshore projects at different stages of development are moving forward slowly along the central and northern east coast. Babcock & Brown's Bluewater wind project off the Delaware coast, at up to 450 MW, is by many considered the most promising so far because it is the only one yet to secure a PPA with a utility. The agreement with Delmarva Power is for the first 200 MW. Babcock & Brown hopes to secure additional PPAs with other utilities to build out the full 450 MW and gain economies of scale. "All of this continues while we're waiting for federal regulations, especially now that we've seen the draft. Our permitting people know what to do to get ready, so we will be ready when the final regulations are adopted," says the company's Lanard.

Meantime, a flurry of development has taken place further north, where the population density is high, making sites for wind farms on land harder to find. Power prices are also relatively high in the area, which makes costlier offshore wind more attractive than in areas where electricity is cheaper. The 25-square kilometre Block Island off the coast of Rhode Island, which imports all its power through diesel shipments, pays as much as $0.68/kWh, according to Firestone. That is an extreme example, he admits, but the New Jersey, Rhode Island, New York, Connecticut and Massachusetts seaboard metropolis generally pays high prices.

"The kilowatt hours are pretty valuable in that neck of the woods," says Benjamin Bell, who heads the US division of wind consultancy Garrad Hassan. Bell formerly led GE Energy's first offshore wind efforts in America. Offshore wind plants would probably need steady payments well north of $110/MWh, says Bell, adding "it depends on where the [price of] equipment settles because right now it's being sucked up for land-based operations." Bell notes a resurgence of interest in offshore wind in America in the past few months, partly driven by Bluewater Wind getting its power contract. "You know, it's coming along and it has its place in the whole sector. Hopefully the economics get there."

Deepwater learning

Rhode Island recently announced the winners of a request for proposals to develop an offshore wind project. A team of experts assembled by Governor Donald Carcieri spent several months evaluating proposals submitted by seven development groups. A company named Deepwater Wind was chosen to move forward. The award is mostly symbolic because it does not include a PPA or significant funding. Rhode Island and Deepwater Wind are currently negotiating a formal development agreement that would include various commitments such as establishing a manufacturing headquarters in the state to build certain components. Rhode Island would in turn reimburse the company some costs for permitting and site evaluation from a state-wide renewable energy fund.

Some of the developers behind Deepwater Wind are from a company formerly known as Winergy, which about five years ago made headlines proposing wind projects up and down the entire eastern seaboard. But lacking in any experience or backing, Winergy was widely considered an unrealistic, fly-by-night operation. "They are still living down that reputation, but they've subsequently become a real company," says Firestone.

The business is now partially owned by investment firm DE Shaw & Co and First Wind (formerly UPC Wind), which is a proven wind developer with 92 MW in operation and another 182 MW coming online shortly.

Deepwater Wind has also taken on a reputable partner in New Jersey, where it teamed up with one of the state's largest electric utilities, PSEG, to develop an offshore wind project. Their Garden State Offshore Energy proposal could see the eventual construction of a project up to 350 MW off the New Jersey coast. The plan was chosen from among five submitted to New Jersey regulators for evaluation and will receive a $4 million grant from the state to offset a portion of the costs of the studies. There again, however, the substantial burden of financing project studies, securing permitting, power purchase arrangements and construction financing is left up to the partnership.

Cape Wind still hopeful

One of the longest running offshore wind developments in America, Cape Wind, is still hopeful. Seven years ago, the company proposed that 130 turbines be built off the Massachusetts coast. Unlike Bluewater Wind in Delaware, which sought a PPA before seeking a permit to build the project, the Cape Wind backers sought first to secure the various permitting approvals. That has meant waiting for the federal government's offshore regulations and facing local permitting challenges. Since its announcement, the project has battled fierce local opposition, largely because of its location between the Cape Cod peninsula and the island of Nantucket, both enclaves of wealthy and politically influential landowners.

Another echo from the past comes from New York, where the Long Island Power Authority (LIPA) has gone back to the drawing board on the development of its offshore wind project. With FPL Energy as its preferred developer, LIPA pushed years ago for a project, but costs and opposition partly derailed it. A new proposal would attempt to mitigate those issues. LIPA and utility Con Edison agreed to study the new proposal for a 300 MW wind plant off the southern end of Long Island.

Not all offshore projects have to be big, it seems. The quiet winner in the race to get the first turbine erected off the coast of America may turn out to be the sleepy seaside town of Hull, Massachusetts. The town's municipality operates two commercial scale wind turbines near its windy shoreline, which have been not only a financial success, but have proved popular with residents. Town officials say the Vestas 660 kW and 1.8 MW units have generated more power than expected and have saved the municipality a lot of money on power bills.

Buoyed by that success, the town has applied to erect up to four turbines, up to 15 MW, just off the coast in state waters. Because local residents are already used to the existing turbines -- and because a project in state waters side-steps federal regulations -- the modest project could become the first wind project to be built offshore in the US.

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